Tesla’s stock value is up a whopping 600% in 2020 alone, with a current market cap of over $550 billion dollars and a P/E ratio of over 1,000. At this moment, it is worth more than Disney, Walmart, or Berkshire Hathaway. Even better, the S&P 500 index managers decided not to allow Tesla in until they were pretty much forced to, as Tesla was now in the top 10 of all US companies. Tesla went up 40% after that announcement because they know that after 12/21 every single S&P 500 index fund and ETF will have to sell a little bit of hundreds of companies and put over 1% of their total assets into Tesla stock (an estimated flurry of $100 billion in mandated trades).
Meanwhile, the Vanguard Total Stock Market fund (VTI) will have to do… nothing. VTI and VTSAX already owned Tesla way back when it closer to $5 a share instead of waiting until it was $600. VTI aims to own the entire US stock market according to market cap. Large-cap, mid-cap, small-cap. Growth and value. Low-vol and high-vol. 3,555 companies, all the way down to Patriot National Bancorp (PNBK) worth only $31 million. Here’s a screenshot of the holdings as of the end of last quarter, October 31st, 2020.
Owning an S&P 500 fund is still a fine idea and this Tesla matter will be noise in the long run, but it is another example of why I prefer the simplicity and quiet elegance of a total market cap fund. You own the entire haystack without lifting a finger, not having to worry about when a company goes from #501 to #490, and vice-versa. The S&P 500 owns most of the haystack, but humans have to vet all the new additions and subtractions (and publicly announce them beforehand).
50 years from now, the haystack will look very different. Here are the top 10 companies as of 2008 (source):
Here are the top 10 companies in the US as of late 2020 (source):
Maybe Tesla will end up justifying their current valuation, or maybe it will be “get crushed like a soufflé under a sledgehammer“. I root for Tesla because I like the advancements in autonomous driving and not having to endure the pain of traffic. (Also, one day I’ll be old and would love full mobility instead of the Handi-Van.) Either way, if you own either the S&P 500 or Total US market fund, you’ll earn the winners. The total market fund will be a little bit quieter, and cost a bit less because you don’t need to pay S&P any licensing fees.
Sometimes I feel like I should write more about stock investing, but I intentionally avoid the short-term noise. I can’t control the outcome, and I can’t predict the outcome, so I detach. This means that I end writing more about my profitable hobbies of earning thousands of dollars in extra income per year by maximizing the interest earn on my bond/cash holdings (same safety, higher return) and credit card rewards. All of this supports my ultimate goal – to get outside and try out this new slackline kit with my daughters that just arrived.
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I wonder how many basis points Tesla added to VTI gains over the years. Not sure if that’s something easily calculated.
I doubt it’ll be terribly significant over the long run, but I did look at VTI vs. IVV and VTI has a higher return for 2020 YTD, but it’s hard to tease out the effects of small cap exposure and other factors. VTI is up about 16.4% YTD and IVV (SP500 ETF) is only up about 13.8% YTD. However, notably VB (US small-cap ETF) is only up 11.52% YTD per Morningstar.
You made a typo. $550 billion, not million. Completely insane valuations. One day last week, Tesla added more to its market capitalization than the whole market capitalization of Ford. In one day! But Ford produces 20 times more cars than Tesla!
Thanks, fixed! I seem to always make the worst typos. I agree, Tesla’s price doesn’t make sense to me. I am fine watching Tesla bounce around in my total index fund, but have no interest in owning it individually… unless perhaps they make a shareholder perk the free enabling of all their software options 🙂
It depends on your model for the future. In one future Ford will continue to make 20x times the number of cars, perhaps slowly transitioning to EVs, self-driving cars, etc. In that future the valuation of Tesla does not make sense.
In another future Ford will disappear and its (GM, etc.) market share will be taken over by Tesla (but also maybe Nio, BYD, even VW). In that future Tesla may be undervalued (the discussion is more subtle of course, we need to take profit margins and other parameters into account).
The key is to assign probabilities to these futures. In the past, many established companies did not survive such technology transitions.
Passive investment replaces the bets on a specific technology development with a general bet on the future of technology.
I think Tesla’s valuation is crazy, but you also have to factor in the GM, Ford, etc. have tremendous liabilities and debts, and an overpaid union workforce. It’s hard to see them surviving any kind of market transition. Without that burden I don’t think it would be a huge deal, but as it is they can only survive on the their most profitable cars. Will the Cybertruck destroy the F-150? If it does Ford is probably done.
“an overpaid union workforce”
Median pay at Tesla and Ford is just about the same with Ford at $58k and Tesla at $56k. HIgh pay union wages at the US automakers have been eroded for decades. They took a big hit in the 2008 financial crisis.
Its also wrong to say they were ‘overpaid’. Thats a negotiated contract wage.
> Will the Cybertruck destroy the F-150?
As far as the Ford’s survival is concerned it is the main (and perhaps the only) question. My bet is that it will, Ford will take too long to transition to EV trucks. Btw, Ford sells nearly a million F150/year in the US. Assuming, $50k each, 20% profit margin and the P/E ratio of 20, just taking over that market segment alone can support $200 billion valuation. These assumptions are on the generous side but far from crazy.